Valdai Club

The expansion of the war beyond the military domain into the economic sphere reflects a carefully calibrated Iranian strategy of economic coercion to prevail in war in the wake of minimal prospects of success in conventional warfighting, writes Hamdan Khan, Research Officer at Strategic Vision Institute, Pakistan.

The war between Iran and the US and Israel underscores a major departure from how wars have traditionally been fought. While the kinetic operations—the US and Israeli strikes against Iran’s land and sea targets and Tehran’s counter-strikes against Israel and across the Gulf—have garnered most attention, they no longer constitute the primary theatre of the ongoing war. Instead, Iran has expanded the conflict beyond the traditional battlefield to encompass economic coercion with attacks on energy facilities, commercial infrastructure, and the disruption of the global commons. The expansion of the war beyond the military domain into the economic sphere reflects a carefully calibrated Iranian strategy of economic coercion to prevail in war in the wake of minimal prospects of success in conventional warfighting.

At the heart of Iran’s non-conventional approach lies the strategic compulsion of military asymmetry. Faced with an existential threat from two overwhelmingly superior adversaries leveraging sophisticated intelligence networks and employing devastating firepower, traditional warfighting offers little chance for Iran to impose costs on its adversaries to dissuade them. Hence, they have turned to expanding the theatre of the conflict beyond the traditional battlefield into the economic realm as a more viable approach. In doing so, Iran seeks to raise the costs for the world economy in general and US consumers in particular to the extent that the war becomes politically and economically unsustainable for the Trump administration.

The blockade of the Strait of Hormuz—arguably the most critical energy bottleneck in the world—constitutes the central pillar of Iran’s strategy of economic coercion. By disrupting maritime traffic through the narrow waterway, which enables roughly 20% of global energy shipments to be conducted, Tehran has effectively weaponised its geography to create a global energy shockwave. It has also attacked key energy facilities in the Gulf, which may not be able to resume production in the near future. The fallout is immediate and shocking for the global economy: energy markets have experienced acute volatility, energy prices have surged sharply, and supply chain disruptions have created energy shortages in countries which are dependent on Gulf imports.

As a consequence, countries across various income categories face a serious risk of cascading economic crises, with inflationary pressure projected to intensify, industrial output at risk of contraction, and fiscal vulnerabilities likely to deepen. While middle-income and low-income countries—several of which already grapple with fragile economic conditions—are particularly vulnerable, the high-income countries in Europe and North America are not insulated from the looming economic shockwave either. 

Simultaneously, Iranian attacks across the Gulf have brought to a halt most commercial activity in the thriving business, transit, and tourism hubs in the region. The astonishingly successful business models of the Gulf states rested primarily on assured stability and security in an otherwise volatile region. However, the targeting of energy infrastructure, transit and logistics hubs, and commercial centres has instilled a pervasive sense of insecurity and unpredictability regarding the world’s most important business hubs. The Gulf's long-term transformation into a high-risk zone could lead to capital flight to other, relatively safer parts of the world. As kinetic operations enter an attritional phase, the toll for the US Gulf allies continues to mount, not only in terms of damage to critical physical infrastructure but also in declining investor confidence and potential long-term economic volatility.

By leveraging its chokehold over the maritime traffic through the world’s most critical energy chokepoint and by disrupting business, transit, and tourism in the Gulf, Iran internationalised the conflict, creating conditions for potential global economic turmoil.

Given the widespread unpopularity of the Iran war among Americans and the fast-approaching mid-term elections, the mounting affordability costs for American consumers may prove to be the biggest inducement for President Trump to seek an offramp.

On the flipside, the US and Israel face two uphill tasks: 1) maintaining military pressure on Iran through aerial bombardment; 2) contending with the new form of war-waging wherein the traditional metrics of success do not apply. While the ferocious air bombing campaign has inflicted widespread damage on Iran’s military and some civilian infrastructure, and has arguably crippled to a significant degree Iran’s ability to mount retaliatory attacks, Tehran has demonstrated the military capability to match the US and Israel at each rung of the escalation ladder. To complicate things further, the probability that only the aerial campaign could create conditions for the toppling of the political dispensation in Iran is minimal. The alternative option, boots on the ground in a geographically vast and anatomically complex Iran, is fraught with grave risks and could translate into a “forever” war quagmire for Washington.

In the face of overwhelming odds on the battlefield, the Iranian regime’s strategy appears to be surviving the aerial bombardment while matching the US and Israel at each rung of the escalation ladder. Meanwhile, Tehran also seeks to use the disruption of Gulf energy supplies as an economic coercion tool to impose costs on the world economy in general and the US in particular, to create compulsions for a ceasefire, and potentially secure a favourable post-war agreement. For the US, the tactical gains through aerial bombardment may prove to be strategically inconsequential if the Iranian regime survives the war, and more importantly, if the global economic fallout of the crisis is not contained and mitigated without significant damage to the global economy.